1. Gibsons Gym is a fitness and aerobic center located in Austin, TX. With over 25,000 square feet of space, Gibsons offers its customers an unparalleled fitness experience, including the finest equipment for cardiovascular training, resistance training, and free-weight training. Gibsons also features state-of-the-art aerobics, spinning, yoga, and tai chi classes taught by nationally certified instructors. And, when not working out, patrons can enjoy other amenities such as Gibsons tanning salon, hot tub, sauna, and juice bar.

The owners of Gibsons Gym currently are working on their operating plan for the coming year, and they have provided you with the following average membership and cost data for the previous year:

Annual membership fee $500 per member

Number of members 5,000

Variable cost (supplies, instructors, etc.) $200 per member

Fixed costs (equipment, salaries, etc.) $1,200,000

The owners anticipate that, for the coming year, both total fixed costs and the variable cost per member will remain unchanged from the previous year.

Assuming the same number of members as last year, what is Gibsons expected before tax profit for the coming year?

What is the unit-contribution margin per member? How many members must Gibsons Gym have to break even?

Assuming a tax rate of 30%, how many more members will Gibsons need to attract this year to reach an after-tax profit of $315,000?

The owners of Gibsons Gym are considering reducing the annual membership fee by 10%. They believe this will increase membership to 6,500 members for the coming year. What will before tax profit be if the owners adopt this strategy (note: the membership fee for all members will be reduced by 10%)? Does this seem like a good option? Why? Support your answer with calculations.

As an alternative to reducing the membership fee by 10%, the owners of Gibsons Gym could increase membership to 6,500 members by adopting a special advertising campaign. What is the maximum amount that the owners should pay for the advertising campaign? Why? (Hint: the amount you calculate will make the owners indifferent between lowering the annual membership fee by 10% and adopting the advertising campaign).